CHILE'S PERSONAL RETIREMENT ACCOUNTS

June 14, 2005

In the Social Security debate, the notion of raising the retirement age is the elephant in the room. Both liberal and conservative economists favor the change, but politicians are terrified to even mention it to voters, says the New York Times' John Tierney.

Encouraging the elderly to work longer seems hopeless at the moment here, but it is already happening in Chile. Its pension system has a stronger safety net for the older poor than America's (relative to each country's wages) and more incentives for people to work, because Chileans' contributions go directly into their own personal accounts instead of a common pool like Social Security.

Once Chileans accumulate enough money in the account to finance a pension that pays at least half their salary (which is better than what the typical American gets from Social Security), they can start collecting the pension and still go on working.

In fact, they have an extra incentive to go on working because they keep more of their paychecks: elderly Chileans, unlike Americans, are freed of the obligation to continue making pension contributions.

The result has been a big change in work habits.

Before the personal-account system began in 1981, Chile had a traditional pension system going broke with the same problems as America and Europe: rising taxes on the young to pay for older workers who were retiring earlier and earlier.

But under the new system, there's been a 30 percent increase in the labor force participation by workers in their 60s, according to two economists, Estelle James and Alejandra Cox Edwards.

Best of all, Chileans who control their own personal-account pensions don't have to count on politicians or groups like AARP to decide when they can retire. It's a personal choice, not a public battle, explains Tierney.

Source: John Tierney, "The Old and the Rested," New York Times, June 14, 2005; and Estelle James and Alejandra Cox Edwards, "Do Individual Accounts Postpone Retirement: Evidence from Chile," University of Michigan Institute for Social Research, Working Paper 2005-098, April 2005.